nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2021‒02‒15
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Trade and Informality in the Presence of Labor Market Frictions and Regulations By Rafael Dix-Carneiro; Pinelopi K. Goldberg; Costas Meghir; Gabriel Ulyssea
  2. Informality and Gender Gaps Going Hand in Hand By Vivian Malta; Lisa L Kolovich; Angelica Martinez; Marina Mendes Tavares
  3. Job quality and labour market transitions: Evidence from Mexican informal and formal workers By Emily Conover; Melanie Khamis; Sarah Pearlman
  4. Impacts of Labor Market Institutions and Demographic Factors on Labor Markets in Latin America By Adriana D. Kugler
  5. How Does Competition by Informal and Formal Firms Affect the Innovation and Productivity Performance in Peru? A CDM Approach By Alvarez, Lourdes; Huamaní, Edson; Coronado, Yngrid
  6. How sustainable is recycling? Reconciling the social, ecological, and economic dimensions in Argentina By Pegels, Anna; Heyer, Stefanie; Ohlig, David; Kurz, Felix; Laux, Lena; Morley, Prescott
  7. Who does and doesn’t pay taxes? By Advani, Arun
  8. Paraísos Fiscales, Wealth Taxation, and Mobility By David R. Agrawal.; Dirk Foremny; Clara Martinez-Toledano
  9. Changes in Social Network Structure in Response to Exposure to Formal Credit Markets By Abhijit Banerjee; Emily Breza; Arun G. Chandrasekhar; Esther Duflo; Matthew O. Jackson; Cynthia Kinnan
  10. Access-for-all to Financial Services: Non-resources Tax Revenue-harnessing Opportunities in Developing Countries By Ali Compaoré

  1. By: Rafael Dix-Carneiro; Pinelopi K. Goldberg; Costas Meghir; Gabriel Ulyssea
    Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an "unemployment," but not a "welfare buffer" in the event of negative economic shocks.
    JEL: F14 F16 J46 O17
    Date: 2021–01
  2. By: Vivian Malta; Lisa L Kolovich; Angelica Martinez; Marina Mendes Tavares
    Abstract: In sub-Saharan Africa women work relatively more in the informal sector than men. Many factors could explain this difference, including women’s lower education levels, legal barriers, social norms and demographic characteristics. Cross-country comparisons indicate strong associations between gender gaps and higher female informality. This paper uses microdata from Senegal to assess the probability of a worker being informal, and our main findings are: (i) in urban areas, being a woman increases this probability by 8.5 percent; (ii) education is usually more relevant for women; (iii) having kids reduces men’s probability of being informal but increases women’s.
    Keywords: Women;Education;Gender inequality;Informal employment;Labor;WP,informal economy,family worker,labor force,working woman,account worker,informal worker
    Date: 2019–05–23
  3. By: Emily Conover; Melanie Khamis; Sarah Pearlman
    Abstract: In this paper we analyse informal work in Mexico, which accounts for the majority of employment in the country and has grown over time. We document that the informal sector is composed of two distinct parts: salaried informal employment and self-employment. Relative to self-employment and formal salaried employment, on average informal salaried workers have lower wages and lower job quality as measured by an index. Education plays a different role in job matches and job transitions, depending on the type of informal employment.
    Keywords: Informal work, job quality, Labour market dynamics, Mexico
    Date: 2021
  4. By: Adriana D. Kugler
    Abstract: This paper documents recent labor market performance in the Latin American region. The paper shows that unemployment, informality, and inequality have been falling over the past two decades, though still remain high. By contrast, productivity has remained stubbornly low. The paper, then, turns to the potential impacts of various labor market institutions, including employment protection legislation (EPL), minimum wages (MW), payroll taxes, unemployment insurance (UI) and collective bargaining, as well as the impacts of demographic changes on labor market performance. The paper relies on evidence from carefully conducted studies based on micro-data for countries in the region and for other countries with similar income levels to draw conclusions on the impact of labor market institutions and demographic factors on unemployment, informality, inequality and productivity. The decreases in unemployment and informality can be partly explained by the reduced strictness of EPL and payroll taxes, but also by the increased shares of more educated and older workers. By contrast, the fall in inequality starting in 2002 can be explained by a combination of binding MW throughout most of the region and, to a lesser extent, by the introduction of UI systems in some countries and the role of unions in countries with moderate unionization rates. Falling inequality can also be explained by the fall in the returns to skill associated with increased share of more educated and older workers.
    Keywords: Employment;Wages;Employment protection;Labor markets;Unemployment;WP,unemployment rate,Gini coefficient,collective bargaining,wage inequality,inequality in Latin America,reservation wage
    Date: 2019–07–17
  5. By: Alvarez, Lourdes; Huamaní, Edson; Coronado, Yngrid
    Abstract: Innovation is one of the main determinants to stimulate productivity. However, incentives to innovate may be affected by the level of competition. In particular, in developing countries, where informality is highly prevalent, formal firms have to face both types of competition: formal and informal. Previous studies have acknowledged a negative impact from competition (schumpeterian effect) but also, several recent studies have shown that competition could spur innovation (escape-competition effect). Given the importance of informal competition in developing countries, as Peru, where almost three out of four firms are informal and the intensity of investment in R&D+i activities is pretty low, this study aims to evaluate the impact of formal and informal competition, at the industrial level, on the whole innovation process and, expressly, on productivity for Peru. By using a CDM model, this study analyses how the intensity of formal and informal competition affects every stage of the innovation process. The CDM model makes possible to study four interrelated stages of the innovation process: i) the firms’ choice to engage with innovation, ii) the amount of resources invested in R&D+i activities, iii) the effects of R&D+i investments on innovation output, and iv) the impacts of innovation outcome on firms’ productivity. The model is estimated using firm-level data collected by the Peruvian National Innovation Survey 2018 and the National Business Survey 2018. Our main findings indicate that competition, both formal and informal, affects negatively the decision to engage in innovation. However, the relationship changes throughout the remaining stages of the innovation process. Whereas the informal competition affects negatively the whole innovation process (engage in innovation, intensity of R&D+I activities spending, innovation output and firms’ productivity) satisfying the Schumpeterian theory; formal competition seems to affect positively the intensity of R&D+i activities spending and also firms’ productivity, which can be explained as an escape-competition effect within the formal firms. In conclusion, meanwhile it is found that informal competition affects negatively the whole innovation process, formal competition could, instead, encourage formal firms’ willingness to invest more in R&D+i activities, increasing their productivity.
    Keywords: Competition, CDM model, informality, innovation, productivity
    JEL: D4 E26 M11 O17 O32
    Date: 2020–09
  6. By: Pegels, Anna; Heyer, Stefanie; Ohlig, David; Kurz, Felix; Laux, Lena; Morley, Prescott
    Abstract: Due to the prevailing economic crisis, Argentina has been facing a growing number of informal workers, many of them urban recyclers. Following the Covid-19 pandemic and the associated decline in formal employment, this number can be expected to rise even further. Increased recycling activity is, in principle, a positive development. However, the working conditions of urban recyclers often do not correspond to the ILO definition of 'decent work'. It is therefore important to ask how the recycling system in Argentina can be shaped to be socially sustainable, as well as environmentally and economically sustainable. Based on qualitative stakeholder interviews, our research aimed to collect and synthesise the ideas and expectations of a diverse set of actors in the recycling sector of Buenos Aires City and selected municipalities of Buenos Aires Province. This enabled us to identify four key areas of dispute and potential action. First, work in urban recycling is a form of social safety net in Argentina, as in many countries with persistent poverty. This can lead to a trade-off between maintaining the social function of the sector and subjecting it to the kinds of efficiency requirements placed on other sectors. Given the inherent power asymmetries between large companies and individual urban recyclers, the latter may be crowded out once the sector becomes profitable.
    Keywords: waste management,urban recycling,cartoneros,sustainability,Argentina
    Date: 2020
  7. By: Advani, Arun (University of Warwick, CAGE, and IFS)
    Abstract: We use administrative tax data from audits of self-assessment tax returns to understand what types individuals are most likely to be non-compliant. Non-compliance is common, with one-third of taxpayers underpaying by some amount, although half of aggregate under-reporting is done by just 2% of taxpayers. Third party reporting reduces non-compliance, while working in a cash-prevalent industry increases it. However, compliance also varies significantly with individual characteristics: non-compliance is higher for men and younger people. These results matter for measuring inequality, for understanding taxpayer behaviour, and for targeting audit resources.
    Keywords: JEL Classification:
    Date: 2020
  8. By: David R. Agrawal. (University of Kentucky); Dirk Foremny (UB - Universitat de Barcelona); Clara Martinez-Toledano (WIL - World Inequality Lab , Columbia Business School - Columbia University [New York])
    Abstract: This paper analyzes the effect of wealth taxation on mobility and the consequences for tax revenue and wealth inequality. We exploit the unique decentralization of the Spanish wealth tax system in 2011—after which all regions levied positive tax rates except for Madrid—using linked administrative wealth and income tax records. We find that five years after the reform, the stock of wealthy individuals in the region of Madrid increases by 10% relative to other regions, while smaller tax differentials between other regions do not matter for mobility. We rationalize our findings with a theoretical model of evasion and migration, which suggests that evasion is the mechanism most consistent with all of the mobility response being driven by the paraíso fiscal. Combining new subnational wealth inequality series with our estimated elasticities, we show that Madrid's status as a tax haven reduces the effectiveness of raising tax revenue and exacerbates regional wealth inequalities.
    Date: 2020–12
  9. By: Abhijit Banerjee; Emily Breza; Arun G. Chandrasekhar; Esther Duflo; Matthew O. Jackson; Cynthia Kinnan
    Abstract: Formal financial institutions can have far-reaching and long-lasting impacts on informal lending and information networks. We first study 75 villages in Karnataka, 43 of which were exposed to microfinance after we first collected detailed network data. Networks shrink more in exposed villages. Links between households that were unlikely to ever borrow from microfinance are at least as likely to disappear as links involving likely borrowers. We replicate these surprising findings in the context of a randomized controlled trial in Hyderabad, where a microfinance institution randomly selected neighborhoods to enter first. Four years after all neighborhoods were treated, households in early-entry neighborhoods had credit access longer and had larger loans. We again find fewer social relationships between households in early-entry neighborhoods, even among those ex-ante unlikely to borrow. Because the results suggest global spillovers, which are inconsistent with standard models of network formation, we develop a new dynamic model of network formation that emphasizes chance meetings, where efforts to socialize generate a global network-level externality. Finally, we analyze informal borrowing and the sensitivity of consumption to income fluctuations. Households unlikely to take up microcredit suffer the greatest loss of informal borrowing and risk sharing, underscoring the global nature of the externality.
    JEL: D13 D85 L14 O12 Z13
    Date: 2021–01
  10. By: Ali Compaoré (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Financial inclusion refers to access to and use of formal financial services by individuals and businesses and the literature unambiguously documented that access-for-all to financial services is conducive to important economic and development outcomes. In this paper, we particularly investigate the impact of financial inclusion on non-resources tax revenue in developing countries. Based on a sample of 63 developing countries over the period 2004-2017 and drawing on the dynamic generalized method of moments (GMM), the paper finds that greater access to financial services captured by the number of ATMs per 100,000 adults increases government non-resources tax-to-GDP ratio, and this result is driven by households consumption and business expansion. Our findings provide insights on tax resources-harnessing opportunities from implementing and promoting financial inclusion policies for developing economies.
    Keywords: G21,H20,O11,O23 Financial inclusion,Non-resource tax-to-GDP ratio,Private consumption,Unemployment,Developing countries
    Date: 2020–12–29

This nep-iue issue is ©2021 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.